Guaranteed return for money partner

[arnoneshel]

Hi,

Yesterday i had a talk with a potential money partner who is willing to provide the funds (around $50K-70K) but is not interested in taking the risk. He`s willing to get a guaranteed return of 15% and want me to personally guaranty that.

If you have some experience on this subject, please let me know your suggestions on how to do it right.

Thanks.

Arnon

 

[timk519]

What`s the best "guaranteed return" he can get anywhere else? Bet it`s no-where near 15%.

 

[KMcFarlane]

I recently had a partner ask the same. But I personally did not feel comfortable doing this, I`m sure you could but there may be many other factors to consider. Also, I`m sure risky outcomes could arise.

I explained it was not in his best interest and in the end he may be leaving alot of money on the table. I even showed some comparisons of different outcomes using a gurateed return vs what he could make sticking to the system. I even did one where the market turned, he got his investment, plus his guranteed ROI and I lost out. Overall, you are trying to create a win/win for both parties involved.

Stick you your system and stay within your comfort level, is my advice.

 

[RedlineBrett]

QUOTE (arnoneshel @ Jan 11 2008, 11:35 AM) Hi,

Yesterday i had a talk with a potential money partner who is willing to provide the funds (around $50K-70K) but is not interested in taking the risk. He`s willing to get a guaranteed return of 15% and want me to personally guaranty that.

If you have some experience on this subject, please let me know your suggestions on how to do it right.

Thanks.

Arnon

Is he expecting to get paid on a certain date or interval?

What are his liquidity expectations? He does know that this isn`t like a mutual fund and he can`t get his money out until you guys choose to sell the property...

Are cash flows re-invested into debt service or how are they treated?

Do you believe enough in the deal that it will return 30% year over year with the input variables you have now?

 

[BobHudson]

I have a different reason for not using the "g" word.

I have been told that guaranteeing a return takes you out of the world and puts you into the world of securities where you have to do things like issue a prospectus. I don`t know if the Ontario Securities Commission would ever care what I was up to, but I don`t really care to find out.

We tell our prospective investors that we are aiming for 20% annual return for them and we show them the calculations. We also outline the risks and include in our JV agreement the concept that we `share` in profit AND losses.

Invariably I get asked to guarantee the 20% return. My first answer is "no. I cannot to that." Then I ask them to check the rates on GICs and Canada Savings Bonds. Not 20% I am guessing!!!

 

[Thomas Beyer]

IF the deal is good enough .. AND IF you are desparate enough .. then yes, do a personal guarantee !

Try to avoid it though .. there are many potential investors out there .. meet 10-20 .. then decide who to work with more closely !!

I disagree with the statement that if you do a personal guarantee you are a security. A security by definition is NOT guaranteed and usually only applicable if you do profit sharing to "large" groups .. say 10 or more (no clear definition of security in real estate exists to my knowledge .. i.e. when is real estate a security .. or when is a JV a security ...)

We do register with the various security commissions (usually dozens of co-investors in a deal structured as LPs), but if you have one partner in a deal you don`t have to .. with or w/o a guarantee !

 

[jarrettvaughan]

If he is looking for a gaurantee, why dont you commit to pay him the 15% but if the investment exceedes 15%, the remainder goes to you. I guess, in a sense, you could call this a loan with a 15% interest rate but i may work for this JV.

Just a tactic that could work if you spin it the correct way.



QUOTE (thomasbeyer2000 @ Jan 12 2008, 03:43 PM) IF the deal is good enough .. AND IF you are desparate enough .. then yes, do a personal guarantee !

Try to avoid it though .. there are many potential investors out there .. meet 10-20 .. then decide who to work with more closely !!

I disagree with the statement that if you do a personal guarantee you are a security. A security by definition is NOT guaranteed and usually only applicable if you do profit sharing to "large" groups .. say 10 or more (no clear definition of security in real estate exists to my knowledge .. i.e. when is real estate a security .. or when is a JV a security ...)

We do register with the various security commissions (usually dozens of co-investors in a deal structured as LPs), but if you have one partner in a deal you don`t have to .. with or w/o a guarantee !

 

[Thomas Beyer]

on 2nd thoughts .. if you get a 2nd mortgage, then the rate is around 12-16%, depending on LTV .. and that IS guaranteed by you, the borrower - usually it is secured by teh proeprty AND by a personal guarantee !

So, IF the deal makes sense .. and IF work with the lender .. then yes, you should consider doing it .. but try to find some other avenues, too !

 

[Nir]

If it`s a property you strongly believe will generate above average return, then do it!

You put nothing down or almost nothing down and even a below average performance property will allow you to pay back the 15% or at least benefit from the same amount in appreciation assuming the property`s value is more than double the amount he is borrowing to you (50-70K) and that "if the investment exceedes 15%, the remainder goes to you" as Jarrett mentioned above.

 

[jeremyfleming]

Yes, I totally agree with the above posters - he is not a JV partner at that point - he is a mortgage investor, and as such, he gets a 2nd registered against title at 15% return....... seems pretty fair and straight forward to me.

I`d sooner do that than split 50% of the deal any day!

Best,
Jeremy

 

[UTCVenturesLtd]

Hi Arnon,
Risk = Reward
While historical deals are not a 100% true indicator of what the future may hold, it does help to be able to show what was done in the past and to show that you did have good judgement. See www.prestprop.com for an example of past performance. I am doing a JV currently with 3G Ventures Inc. building a 1200 sq ft cabin to "flip". http://ca.geocites.com/utcventures/lakelot.html Being our first JV, the president of 3G Ventures Inc. is giving 2 of us JVs an opportunity to recieve 100% returns. Once the "flip" is sold and the cheques are paid out, that will be past performance as well to attract more investors wanting to do JVs. (But don`t expect those kinds of returns) That is a big playing card in attracting investors! I know that there are some real estate companies out there who have never lost money for their investors as well. Real estate may be subject to dips, but the general trend over time is up, up and up. Look at the terrible bust in Calgary back in the early 80`s... prices now are over 4 times what they were!

Attracting JVs is not an easy task or any investors for that matter. I taught a fellow at work how to buy and sell stocks and it turned out his father worked at a company in the USA that created shell companies. They had to get a number of investors to buy the shares and he was able to get me on board some new companies. So that they were not creating a puppy mill of investors, he had to get new investors as well for each new IPO. I had made some money on a few of the IPOs in the past and was quite willing to help. Very few people would put up a mere $100 USD. Well, one particular company was a tech stock and it went from .10 cents to $8 and i sold out just over $7 netting around $35,000 CDN on that deal. I shook my head at all those who did not invest and really missed out. ( I sure could use another one of those deals now!)

 

[invst4profit]

I thought only banks could guarantee a return.
If an investment backed by an individule fails or the individule goes
bankrupt how is the investment guarenteed?

 

[brentmatheson]

A guarantee is one form of security that investors use in case things go sideways. That being said, they`re not worth the paper that they`re written on if you have no means of paying them back. Another option to protect the investor`s security is to register a caveat on title. This way they have the teeth sunk into a property until you`ve paid them back.

I`ve used both guarantees and caveats. The important thing is to provide enough security that you`ll get the money. No money = no growth!

Brent